Big Easy Heads for Higher Ground

Almost two years after Hurricane Katrina flooded 80% of New Orleans, the city is reinventing itself geographically and literally scrambling northward onto higher ground. During the storm, canals, levees, elevations and natural barriers all dictated which neighborhoods would survive and which ones wouldn't.

Because the city remains at high risk for damage and flooding from future hurricanes, some homeowners, businesses and investors have been reluctant to move back to the city center. They believe it is only a matter of time — years or decades — before New Orleans floods again. A number of factors contribute to their wary outlook, including an average elevation of five feet below sea level, coastal erosion, and unreliable levee and flood control systems. They also cite questionable leadership and a lack of funding for flood-control projects.

Many residents and businesses are moving forward with those vulnerabilities in mind. Developers, economists and business leaders point to the I-12 corridor between Slidell and Baton Rouge as the future of south Louisiana. According to the U.S. Census Bureau, 4,863 of the 7,093 single-family construction permits issued in the New Orleans regional area last year were for the north side of Lake Pontchartrain.

While Orleans Parish lost half its population and tax base after Katrina, St. Tammany Parish — its neighbor north of Lake Pontchartrain — actually saw increases in both. Even before Katrina, the north shore was seen as an oasis for families trying to escape the crime, poor public schools and quality of life of the south shore. In a region below sea level, St. Tammany's higher elevations stand out.

“It doesn't take a brain surgeon to look at the map, the eroding coast, elevations and realize that it might be smarter to set up shop a little bit more north,” says Skip Weber, a commercial real estate agent with NAI/Latter & Blum.

Just off the failed 17th St. Canal in the heavily flooded New Orleans neighborhood of Lakeview, some residents who decided to stay and rebuild after the storm are jacking up their homes as high as 12 feet above street level and turning the lower parts of their houses into carports and patios. Others are moving their living quarters from the first floor to the second and third floors.

Weber says some businesses are placing sensitive equipment higher in their buildings. “We're going to see a new norm, and things are going to have to be elevated. I would think that even if there aren't any regulations now, over time, that's going to come. We're just going to have to learn to live with the threat,” says Weber.

Politics of population

New Orleans may also be shifting its population. Some economists and brokers say that many parts of the city are emerging from Katrina in a pattern similar to that of the community of Homestead, Fla., which was smashed by Hurricane Andrew in 1992.

There, the elderly and poor left in large numbers while the middle class and its tax base came back stronger. In the Crescent City, where commercial real estate is tied to the return of the population, the Katrina fallout has become a rare buying opportunity to get in early on what investors hope will be revitalized, up-and-coming neighborhoods.

There's a lot of debate about whether the poor African-American majority is inadvertently being prevented from returning to New Orleans. Much of the public housing has yet to reopen, while market-priced housing is beyond the reach of the working poor. Federally subsidized Section 8 units are limited.

The Housing Choice Voucher Program offered by the Department of Housing and Urban Development under Section 8 subsidizes apartments and other residences for low-income families. Many say it is a critical element in the recovery of the old New Orleans.

Before the storm, 23.2% of city residents lived in poverty, almost double the national rate of 12.7%, according to the Census Bureau. But that acute situation has eased somewhat. The U.S. Commerce Department reported that Louisiana posted a 25.5% increase in per capita income in 2006.

While the numbers reflect the loss of an impoverished population rather than a sudden rise in economic prosperity, a less-populated city isn't necessarily a bad thing, says Dr. Ivan Miestchovich, director of the Center for Economic Development and the Real Estate Market Data Center at the University of New Orleans (UNO).

“In the short run — the next five to 10 years — any return of the low-income population will be offset to some extent by the influx of dollars that will be working their way through the economy,” says Miestchovich. “The question is whether the economy will gain some more traction and start attracting better-paying jobs and long-term growth.”

Shifting apartment landscape

When Katrina struck, much of the area's multifamily housing market was thrown into disarray. According to apartment broker Larry Schedler of Larry Schedler & Associates, the city lost 27% of its units — approximately 13,000 — after the storm. In New Orleans East, which originally held 15% of the area's apartments, virtually every unit was severely damaged by wind and floodwaters.

“The apartment market that existed here 18 months ago is about as relevant as the one that existed here 18 years ago,” says Schedler. “Just when I thought I had figured it out, everything changed.”

Average rents have increased by 30%, according to the Apartment Association of Greater New Orleans. Between 2005 and 2006, average rents jumped from $578 to $803 for one-bedroom units, from $676 to $940 for two-bedroom units and from $868 to $1,206 for three-bedroom units.

Landlords and property owners say increased insurance, maintenance and raw material costs have not only eaten up profits but in a number of cases put owners in the red. Some landlords have seen insurance premiums increase more than 400% since the hurricane. On average, the occupancy rate across the metro area is 98%, Schedler says.

Affordability is key

UNO Chancellor Tim Ryan says affordable housing is crucial to the city's recovery. With a service-based economy focused on tourism, conventions and entertainment, working-class families need places to resettle. The city continues to suffer from a shortage of workers, and all types of businesses from retailers to restaurants have raised wages in an effort to attract workers.

With moratoriums on new multifamily developments in parts of Jefferson Parish and St. Tammany, and with most of New Orleans' available land built out, Schedler says that only the eastern section of the city and a handful of infill locations can accommodate workforce housing. The lack of workforce housing has hindered the pace of recovery, but out-of-town investors with their own financing and in-house construction crews are slowly finding opportunities and filling a void.

“They're the ones that in most cases are coming in and taking on the challenges. If you're a buyer looking for heavy rehab, we've got a lot of products for you,” says Schedler.

Gene Ratchford, president of Triangle Real Estate Services in Gastonia, N.C., says that after Katrina destroyed one of his New Orleans East apartment complexes, the company not only rebuilt, it also bought more properties. Triangle's projects include a 346-unit complex, a 400-unit complex and a property that is currently undergoing heavy rehab.

“I think there are good opportunities here. The market may be a little bit harder but there are a lot of good people that need places to live. We're just trying to bring it back,” says Ratchford.

Geographic division

Had the Metairie-side floodwalls of the 17th St. Canal failed during Katrina, the area's problems might have doubled. While some parts of New Orleans were overrun by 10 feet of water, the neighboring community of Metairie escaped with a few spots of knee-high flooding. Since August 2005, the canal has proved to be a dividing line between problems and relative prosperity, and even today the contrast between the two sides is stark. New Orleans' population is estimated at little more than 200,000, while neighboring Jefferson Parish is home to more than 400,000 residents.

Not only are residents migrating, so are businesses. In 2006, Latter & Blum Realtors reported almost 1.9 million sq. ft. of leasing and sales transactions in East Jefferson compared with 730,000 sq. ft. in New Orleans. Industrial properties in New Orleans East and the central business district continue to see poor demand while East Jefferson is almost at capacity. Miestchovich says there is an ongoing trend of industries moving north and west from New Orleans to outlying parishes.

“We're having sort of a shift in the economic nucleus of the region. Some of that is shifting westward and up river, and to the northwest along I-12 and I-10. I think some of it is long term and will play out for the foreseeable future,” says Miestchovich.

Donald Schwarcz, principal of SRSA Commercial Real Estate Inc., says approximately 1.5 million sq. ft. of retail space has been proposed on the north side of Lake Pontchartrain between Slidell and Covington.

For example, Colonial Pinnacle Nord du Lac, a more than $200 million, 900,000 sq. ft. retail center being developed by Birmingham-based Colonial Trust Properties, sits at the intersection of I-12 and Highway 21 within a 30-minute drive of more than 230,000 potential customers with an average household income of $64,000.

“The intersection near Highway 21 and I-12 has already become a major retail location. There's an awful lot of retail in an area that was nothing more than pine trees five years ago,” says Schwarcz.

Located just north of the small town of Madisonville, the intersection of these two major thoroughfares is already home to national retailers such as Target, Best Buy and Linens ‘n’ Things.

The recovery puzzle

In some sparsely populated neighborhoods such as Lakeview and Chalmette, Weber sees a classic chicken-and-egg syndrome. No one seems to know what pieces of the complicated recovery puzzle should come first. Retail won't open if the neighborhood is unpopulated, and residents won't return to a neighborhood that lacks services. And while businesses need to cater to residents, they need residents to run the businesses. Nearly two years after Hurricane Katrina, in some neighborhoods there's neither chicken nor egg.

Rich Stone, vice president and director of commercial sales and leasing at the brokerage firm NAI/Latter & Blum, says the recovery of the residential market directly affects the retail market. While retail shopping flourishes in Jefferson Parish, it has been mainly confined to staple items in New Orleans East and St. Bernard.

Stores like Home Depot and Wal-Mart were the first to reopen in some of the hardest-hit areas while specialty retailers such as office product and shoe stores and electronics retailers were among the last. So far, national retailers appear hesitant to fill in the gaps.

“The pace of recovery of the retail sector is attributable to the number of rooftops that come back. There is probably going to be a little reluctance on the part of national retailers to come into some areas for a while,” says Stone.

According to Schwarcz of SRSA Commercial Real Estate, the absorption rate for the retail market inventory in New Orleans is only 75.3% compared with 93% in Jefferson Parish and 97.7% in St. Tammany.

While Schwarcz notes high growth in St. Tammany, he says that because Katrina cancelled many leases, some big retailers and projects may find new opportunities in New Orleans that they've never had before.

The Trump International Hotel & Tower, for instance, will feature 435 condo hotel units, 299 luxury condo units, two floors of retail space and 13 floors of parking. Construction on the $400 million project is set for June. The 1.6 million sq. ft. building will stand 716 feet tall with a 126-foot spire, making it the tallest building on the Gulf Coast.

There are also plans to create a Hyatt Jazz District with a 20-acre performance arts park anchored by a National Jazz Center. It would call for the demolition of 1 million sq. ft. of public buildings, a new city hall and courts. Costs are estimated at $716 million and are expected to generate more than $6 billion in economic benefits over 20 years.

Never before has a major American city lost half its population in a single event. Step by step, piece by piece, New Orleans is rebuilding and recovering.

Dangerous and risky, but with opportunities for big rewards, the Big Easy has become a real estate frontier. Opinions vary as to how the evolving city will function and what it will look like. But as the critical ingredients of insurance, population and capital fall into place, the next few years may offer a rare opportunity to take part in the rebuilding of an entire city and its economy.

Craig Guillot is a New Orleans-based writer.

PARISHES' FORTUNES VARY

Development and recovery in the New Orleans metro area is dictated largely by geography. Perched on higher ground north of Lake Pontchartrain, St. Tammany Parish has experienced a building and population boom since Katrina. To the west of New Orleans, Jefferson Parish has seen a return of almost all its population. But in New Orleans, thousands of homes and businesses still lie vacant and only half of the 452,000 pre-Katrina population has returned.